EXETF - Extendicare

[yadayada]

42 mill for US lease entity post deal? If they lease out all their beds on the US side and sell operations side, then they probably get small amount for that. And US operations REIT will get way more then 42 mill in ebitda. I think it should be more like 50-60 mill in AFFO. You can look at SABRA as an example. I think slightly lower amount of beds of roughly same quality. Plus they get a higher multiple on that because it is a REIT. So 15x seems plausible.

 

I think the point here is that the US entity is undermanaged at the moment and barely generating any cash. If some large consolidator takes up operations they profit from large scale and can lease beds from the new EXE entity among others.

 

If you assume value from canadian entity is around 500 mill, then it seems they should get at least 6-800 mill from the US entity, wether selling it or simply only leasing out the beds.

 

But I think they will sell it , and not lease out the beds.

 

Also 6-800 mill for US entity seems pretty conservative. That SBRA REIT now has a 1.36 bill valuation with LESS beds. Funny thing is, SBRA i think is leasing some beds to Extendicare.

 

Even if there is only 45% upside, if it takes a year that is probably 50% including dividends. And it is a question of when, not if.

[jmp8822]

People have been talking about the Canadian biz is worth this much and the US biz is worth this much.  No one is really talking about this event driven trade from the "most likely event unfolding perspective"

 

Here's my lay of the land and here's what I think will happen:

 

US subsidiary Debt $662mm

Can Subsidiary Debt $367mm

Canadian Parent Debt $121.9mm

 

US EBITDA $110mm (annualized based on Q1 and Q2, includes $15mm in Kentucky lease and prior to $27mm PA leases)

Can EBITDA ($72mm)

EBITDA to AFFO bridge

 

$182mm less $20mm for FFEC (furniture/fixture = maintenance cap ex) depreciation, $4mm accretion cost, $60.8mm interest expenses) equals roughly $95mm Pre-Tax earnings.  Less $28.3mm in tax @30% of the pre-tax figure gets us to a $66.7mm figure.  Add back amortization of financing cost, principal portion of govt cap equates to $77.0mm AFFO as is. 

 

Pro-Forma Transformation

 

Company retains $15mm + $27mm of Kentucky and PA lease and sells the rest of the centers off.  Let's say they can get $876mm (11269@$77.8k per owned bed) for assets other than Kentucky and PA.  This figure would equate to 12.8x EV/EBITDA.  The buyer will probably just assume the debt and write a check for the equity portion of $876mm less $662mm of debt.  In my opinion, the most "likely" use of the excess cash of ($876 less $662mm = $214mm) will be to pay off the Can Parent debt of $121.9m.  There will be an excess of $92mm of cash from the transaction. 

 

Post Deal – The EBITDA to AFFO Bridge looks like this

 

$72 Can EBITDA + $42mm US Lease EBITDA = $114mm of total EBITDA.  FFEC drops to $8mm a year.  Interest is now $20mm, Accretion cost is $1.4mm.  Pre-tax earnings is $84.4mm.  Less $25.3mm of taxes @30%.  FFO is only $59mm versus $62mm previously.

 

The problem here is capturing the Lease revenue from PA and Kentucky in the Canadian entity.  At 15X FFO, we’re looking at $885mm market cap.  Doesn’t seem like a lot of upside here.  More upside available if the Kentucky and PA properties can be spun off into a separately traded REIT.  $42mm at 12x EV/rent multiple is $504mm or $5.72 per share.  A generous valuation would be $630mm @ 15x EV/Rent equating to $7.15 per share.  The Can standalone will generate about $30mm of FFO.  At 15x FFO, that's $450mm of market cap or $5.11 per share.  Add back $1.05 per share of excess cash.   

 

In a best case scenario, we're looking at a $11.10 if they keep the US properties in the holdco.  $11.88 if they spin off the RE and the market value it at 12X EV/Rent and $13.31 in the best case scenario.  Love to hear some feedback from people.  I'm using large multiples to get to a max value figure. 

 

 

 

I would be disappointed if they sold the remaining beds for $77.8k each.  Those beds are underperforming because of poor management, which is why they are up for sale in the first place.  SBRA is trading at $140k EV/bed for the real estate alone as a US REIT.  What's the right price of the EXETF beds?  I'd say more than $77.8k each, maybe $100k+, which would certainly effect the valuation numbers. 

 

*Apologies: posted after yadayada, without seeing the prior post

[BG2008]

CareTrust - REIT spinoff of Ensign - is trading at $65k per bed. 

 

"As of June 30, 2014, the 94 skilled nursing, assisted and independent living facilities owned by the Company and leased to Ensign had a total of 10,121 operational beds"

 

 

[BG2008]

My assumption is that they get $875mm for the beds/operation outside of the Kentucky and PA.  Who says the US is barely generating any cash?  Has anyone looked at the supplemental financials? 

 

http://www.extendicare.com/uploads/public/51/docs/Webanal_2014%2006.pdf

 

Page 4.  The US operation generated $55mm of EBITDA in 1H 2014.  This is $33.6mm more than the Can operation. 

 

 

42 mill for US lease entity post deal? If they lease out all their beds on the US side and sell operations side, then they probably get small amount for that. And US operations REIT will get way more then 42 mill in ebitda. I think it should be more like 50-60 mill in AFFO. You can look at SABRA as an example. I think slightly lower amount of beds of roughly same quality. Plus they get a higher multiple on that because it is a REIT. So 15x seems plausible.

 

I think the point here is that the US entity is undermanaged at the moment and barely generating any cash. If some large consolidator takes up operations they profit from large scale and can lease beds from the new EXE entity among others.

 

If you assume value from canadian entity is around 500 mill, then it seems they should get at least 6-800 mill from the US entity, wether selling it or simply only leasing out the beds.

 

But I think they will sell it , and not lease out the beds.

 

Also 6-800 mill for US entity seems pretty conservative. That SBRA REIT now has a 1.36 bill valuation with LESS beds. Funny thing is, SBRA i think is leasing some beds to Extendicare.

 

Even if there is only 45% upside, if it takes a year that is probably 50% including dividends. And it is a question of when, not if.

[jmp8822]

CareTrust - REIT spinoff of Ensign - is trading at $65k per bed. 

 

"As of June 30, 2014, the 94 skilled nursing, assisted and independent living facilities owned by the Company and leased to Ensign had a total of 10,121 operational beds"

 

If you combine the pre-deal ENSG with the current REIT, EV/bed is $145k.  They decided to give a somewhat favorable deal to the operator (because they spun it off and could cut any deal they wanted), which depresses the per bed valuation of that REIT.  A purchasing entity can slice and dice however they want, but the difference between $145k EV and $80k EV is staggering.  Slap a discount on it because ENSG is better than EXETF, but not 45% when this is a negotiated transaction.

[yadayada]

yeah that is basicly a worst case scenario for EXE. And that thing is valued at 400m$. Using those metrics, That would still probably about a billion$ total for Exe. Or over 30% upside. But if you get more optimistic you can even go north of the 100% range.

 

And you don't even need to make aggressive assumptions with regard to multiples imo.

[BG2008]

Can you lay out your math summing up all the different components including the debts to arrive at a $1bn market cap?  It would be helpful to see all the math given how much leverage there is embedded in the name. 

 

yeah that is basicly a worst case scenario for EXE. And that thing is valued at 400m$. Using those metrics, That would still probably about a billion$ total for Exe. Or over 30% upside. But if you get more optimistic you can even go north of the 100% range.

 

And you don't even need to make aggressive assumptions with regard to multiples imo.

[BG2008]

Ensign and Extendicare US is an apple to orange comparison.  Ensign is best in class.  Teens operating margin.  It's like comparing a McDonald's with the RE and Ruby Tuesday with the RE.  Post deal, Ensign also made some acquisitions which boosted it's current share price.  The buyers of Extendicare's US division is buying a "currently poor" operator and the underlining real estate.  Like many on the board said, Extendicare should not get the benefit of any operation turnaround that the buyer achieves.  They should just get the value of the real estate.

 

 

CareTrust - REIT spinoff of Ensign - is trading at $65k per bed. 

 

"As of June 30, 2014, the 94 skilled nursing, assisted and independent living facilities owned by the Company and leased to Ensign had a total of 10,121 operational beds"

 

If you combine the pre-deal ENSG with the current REIT, EV/bed is $145k.  They decided to give a somewhat favorable deal to the operator (because they spun it off and could cut any deal they wanted), which depresses the per bed valuation of that REIT.  A purchasing entity can slice and dice however they want, but the difference between $145k EV and $80k EV is staggering.  Slap a discount on it because ENSG is better than EXETF, but not 45% when this is a negotiated transaction.

[yadayada]

Too lazy to pull up figures again, but watch the dropbox link video earlier posted. They do a good job of explaining.

 

yeah that is why the US operating side is worth very little. Too lazy to pull up figures, but you put a 12-16x, or something like that, on Canadian AFFO. That is around 5-600 mill. Seems to be a very safe bottom because supply demand ratio is better for Extendicare in Canada then in the US (and likely to stay that way). And then you look at the beds of US side. Obviously they do not benefti from scale enough and are also not very good operators. So that is why the value is hidden here. But the point is that the two can be seperated and that leasing those beds out reduces risk and does not take a skilled operator. So that should yield more affo and a higher multiple.

 

Their operating business on the US side is worth very little. If they sell, a buying party would obviously look at the two seperately.

 

So basicly their operating side is interesting to a good operator who wants to scale up and benefit from operating leverage. And it seems the model is that you seperate the opco and propco and leave almost all the leverage with the propco, and then try to consolidate the propco's.

 

And judging by those other US reits, the US reit should then be at least worth 5-600 mill. It has been said already that the beds are average, not below average or above average. Yet that 5-600 mill in value assumes they are somewhat below average.

 

A small risk could be here that management doesn't care and just sells the operating company for not too much money. That would be kind of stupid ofcourse. Just because they suck at operating these things and don't fully benefit from scale, does not mean someone else cannot squeeze a lot more money out of these things.

 

Sort of like the buffett story of the salt store with a lot of salt. Man walks in and sees all the salt and says to the store owner, you must sell a lot of salt! And then the store owner says, no btu you should see the guy selling me the salt.

 

Just like how making airplanes can be a good business with high barriers of entry, but the guy your selling it to is in a very crappy business. But because there is always steady demand for airplanes, people will always need them, and you can always be assured to sell your airplanes to some airliner who then proceeds to make little to no money with them. Or actually loses money.

[magno111]

1. take another look using the recent transaction. They leased 2500 beds for 26M in the US using a 6,5% cap rate the value of those beds is 390M, so the value per bed is around 140k. OK those beds had 95% occupation but ligation risk seems to be high in PA. The rest of the US is around 85% occupation, apply a monstrous 40% discount. that is equal 90k per bed. so the rest of US is valued at 1100M, less 600m debt, less ~ 100 tax, that nets 4.5$$ per share using a conservative valuation. And the Holdco as you pointed out is worth around 10-11$ per sahre. That equals 14$ per share.

 

2. Take a look at lesiureworld in CA. market cap is 500M and they have 600M debt.  LW's EBITDA is around 55M ( holdco will be around 120m), LW is way more leveraged than EXE will be ( 11x versus 6x). EBITDA margin will be the same at both companies (10%-12%).  EXE Holdco is going to own 9.2K bed and manage another 5k beds in Canada. lesiureworld only owns and manage 5k beds.

 

So LW is trading for 20x EV/EBITDA and P/AFFO is around 14x, pay-out is close to 100%. even if you apply a 25% discount 15x EV/EBITDA for holdco value per share is around 12$ per share. valuation at 14x P/Affo share seems ok because LW is much more leverage that gives you 10$ a share

 

3. BG you were referring to ensg as a comp. I reccomend to listen Q2cc and read ENSG materials. This is an extract  from Q2 cc:

 

Robert M. Mains - Stifel, Nicolaus & Company, Incorporated, Research Division

 

Got it. And then a question on acquisitions. Some of the REITs have talked about pretty elevated prices that are being asked for some skilled nursing facilities. And obviously, you're not fishing in that same pond, but I'm wondering if you're seeing any kind of ripple effect on pricing for some of the types of assets that Ensign would be interested in.

Christopher R. Christensen - Chief Executive Officer, President, Director and Member of Quality Assurance & Compliance Committee

 

Christopher R. Christensen - Chief Executive Officer, President, Director and Member of Quality Assurance & Compliance Committee

 

Yes. Look, there are -- we're actually a little surprised how much is available right now. There definitely has been upward price movement in the highly performing assets. The ones that are performing well qualitatively and financially, they probably are at all-time highs or close to all-time highs. I remember in '07 or '06 or sometime in that timeframe them being about this high. But we haven't seen that same price movement in mediocre-performing or poor-performing assets. We still feel like there's some good pricing out there on those assets. I hope I'm not hurting our business plans.

 

 

There is demand for SNF assets and SNF's prices are all time highs,  US EXE skilled mix is around 40%, ebitda margin is around 10% and as i mentioned before occupancy is around 85%.

 

ENSG paid around 60k-65k for crappy beds and then turns them around. These are mom and pop operations with occupations around 65%-70%, 6%-7% ebitda margins,30% Skilled mix revenue( look at ENSG DEC'13 presentation). As you can read REIT's are paying high prices for SNF beds. EXE isn't probably the best operator but they have decent properties as we saw in the recent transaction. ENSG occupation is around 80%, EBITDA margin was around 13%-14% ( before the split of the company).

 

Pre-split ENSG had an EV of 1200m, post split EV combined is around 1400M. they owned 10k beds ( they rent another 3k beds), so value per bed is around 120k-140k, but this is THE best absolute operator.

 

4. Look at a very recent transaction. The SKH merger with Genesis. SKH  has around 10K beds ( 8600 snf +1600 ALF). occupation is 83%, lower than EXE ( this is a very important factor in valuation), EBITDA margin is almost the same in both companies, 12%. SKH's ebitda is 72M, so genesis paid around 10x EV/EBITDA  ( EV of 700m for SKH). if you apply that valuation to US EXE  value per share is 3,5$. The transaction was made at 70k per bed, using that valuation value per share is 2,30$. ( assuming 25% tax rate on RE gains).

 

but SKH's shareholders are suing the company, they think takeover price was unfair, read this PR http://www.digitaljournal.com/pr/2148153 ,  they think 9$ is fair, that is a 25% higher  so that means a comparable value for US EXE will be between 4.5$-3$, depending valuation method you choose.

 

i think the low case is 12,50$, base case is around  14,50$, bull case is around 16$. At 8,60$ EXE has a nice upside with a strong catalyst, and management said in the last CC they will be closing in 3 to 5 months.

 

thank you.

 

 

[Myth465]

I dont think its that complicated if you look at the last transaction and also look at where reits are trading in the market place.

I dont know exactly how much its worth, but I know there is at least 30% upside with low to no risk. This is on top of the 20% I have already made,  7% yield over the year, and 6% yield while I wait.

 

I bought more.

They will get the best deal they can, it will be better than the current situation, the Canadian business will get a higher market value stand alone, and will have better growth prospects.

 

Upside is in the value you get for US Sub

and value associated with the rerating of the better CDN business

 

I liked what I saw in the corner but havent had time so far to do a proper review / write up

[saltybit]

getting interesting again at this price

[doc75]

Results out...

 

http://finance.yahoo.com/news/extendicare-announces-2014-third-quarter-223130597.html

[magno111]

Results out...

 

http://finance.yahoo.com/news/extendicare-announces-2014-third-quarter-223130597.html

 

nothing new

 

good to see that self-insured liabilities  will come down after the PA transaction

 

i expect they close the sale before year end... probably they will talk about that tomorrow

[doc75]

Results out...

 

http://finance.yahoo.com/news/extendicare-announces-2014-third-quarter-223130597.html

 

nothing new

 

good to see that self-insured liabilities  will come down after the PA transaction

 

i expect they close the sale before year end... probably they will talk about that tomorrow

 

Yeah.  My guess is that this will sell off to some degree based on the status quo results and lack of definitive news regarding the U.S. sale. 

 

 

[NoCalledStrikes]

Results out...

 

http://finance.yahoo.com/news/extendicare-announces-2014-third-quarter-223130597.html

 

nothing new

 

good to see that self-insured liabilities  will come down after the PA transaction

 

i expect they close the sale before year end... probably they will talk about that tomorrow

 

Close before which year end? Perhaps announce before this year end, but with all the regulatory issues, I would expect any deal to be require four to six months of approvals.

[buylowersellhigh]

 

Extendicare Enters Into Definitive Agreement to Sell Its U.S. BusinessStrategic Review Conclusion Will Crystallize Significant Value for Shareholders

 

MARKHAM, ON -- (Marketwired) -- 11/07/14 --

 

Extendicare Inc. (EXETF) ("Extendicare" or the "Company") announced today that the Company and its subsidiary, Extendicare International Inc., have entered into a definitive share purchase agreement to sell substantially all of the Company's U.S. business (the "Transaction") to a group of investors led by Formation Capital, LLC, a healthcare-focused private investment firm, and an affiliate of Safanad Inc., a global principal investment firm (the "Purchaser") for US$870 million (C$992 million at the current exchange rate). Separate from the Transaction, Extendicare(EXETF) has also retained rights for future upside from rent sharing above specified thresholds on certain facilities to be leased as well as proceeds from the sale of ten centers not included in this transaction.

 

"After an extensive strategic review process, and months of negotiating and deal structuring, we are pleased to have reached an agreement to sell our U.S. business," said Tim Lukenda, President and CEO of Extendicare(EXETF). "The purchase price reflects an attractive EBITDA multiple and will crystallize value for Extendicare(EXETF) shareholders."

 

"This transaction realizes our stated objective of separating our U.S. and Canadian businesses," Lukenda continued. "Importantly, this transaction generates substantial cash proceeds that accelerate our vision to further grow our Canadian business and expand our service offering."

 

Details of the Transaction

 

The purchase price will be partially settled through the assumption by the Purchaser of approximately US$635 million of mortgage loans and other indebtedness relating to the U.S. business. An additional US$30 million of indebtedness will be repaid at closing. After accounting for tax, working capital and other closing adjustments, the Company expects to receive net cash proceeds from the Transaction of approximately US$222 million (C$253 million at the current exchange rate), which is expected to close in the second quarter of 2015. The Company intends to use the proceeds from the sale to expand and grow its continuing Canadian operations.

 

The purchase price of US$870 million represents a multiple of 8.8 times trailing twelve months normalized EBITDA of US$99 million from the U.S. business, which excludes strengthening of prior period reserves for self-insured liabilities. In addition to the cash purchase price of the Transaction, Extendicare(EXETF) will retain an interest in an ongoing cash stream of approximately US$6 million per year, net of upfront costs, for 15 years, plus the potential for profit sharing on certain leased centers.

 

As at September 30, 2014, Extendicare's(EXETF) U.S. senior care portfolio was composed of: 141 owned and operated senior care centers; four centers operated under lease arrangements; ten centers operated under managed contracts; and 21 centers in Kentucky leased to a third-party operator.

 

Extendicare (EXETF) will retain ten of the U.S. skilled nursing centers, which will continue to be held for sale, and will retain its indirect wholly owned subsidiary, Virtual Care Provider, Inc., which provides a range of information technology solutions to long-term care providers, and its wholly owned Bermuda-based captive Laurier Indemnity Company, Ltd., which insures its U.S. general and professional liability risks (the "Retained Assets").

 

The Transaction will be completed by the transfer to the Purchaser of all of the issued and outstanding shares of Extendicare Holdings, Inc., a subsidiary of the Company that indirectly holds all of the shares of the Extendicare(EXETF) subsidiaries that own and operate the U.S. business. Completion of the Transaction is subject to receiving certain U.S. state licensure approvals, lender and other third party consents and other customary conditions.

 

The following table reflects the approximate revenue, net operating income, Adjusted EBITDA and AFFO of the U.S. business (excluding the Retained Assets), and includes Extendicare's(EXETF) consolidated expense for self-insured resident care liabilities, which includes strengthening of prior period reserves. The operations to be disposed of under the Transaction will be accounted for as discontinued operations beginning in the fourth quarter of 2014.

         

(US$ millions) Trailing Twelve

Months Ended

September 30, 2014   Nine Months

Ended

September 30, 2014   Twelve Months

Ended

December 31, 2013

Revenue 1,155.7   868.9   1,152.4

Net operating income (1) (2) 129.4   105.9   128.9

Adjusted EBITDA (2) 83.4   73.0   83.1

Adjusted funds from operations (2) 30.3   28.5   37.3

(1) Includes self-insured liabilities expense of: 51.8   31.5   52.9

(2) Refer to discussion of non-GAAP measures        

         

 

Guggenheim Securities acted as financial advisor, and Bennett Jones LLP acted as legal advisor to the Board of Directors and its Strategic Committee in connection with the Transaction.

 

BofA Merrill Lynch and Desjardins Capital Markets acted as financial advisors, and Skadden, Arps, Slate, Meagher & Flom, LLP and Goodmans LLP acted as legal advisors to Formation Capital.

 

ABOUT EXTENDICARE(EXETF)

 

Extendicare (EXETF) is a leading North American provider of post-acute and long-term senior care services. Through our network of owned and operated health care centers, our qualified and experienced workforce of 35,900 individuals is dedicated to helping people live better through a commitment to quality service that includes skilled nursing care, rehabilitative therapies and home health care services. Our 259 senior care centers in North America have capacity to care for approximately 28,400 residents.

 

ABOUT FORMATION CAPITAL INC.

 

Formation Capital, LLC is a leading private investment management firm focused on equity and debt healthcare investment opportunities. Since 1999, Formation Capital and its investors have invested over US$5.5 billion of capital in seniors housing and care, post-acute services and health care real estate. For more information regarding Formation Capital, visit www.formationcapital.com.

 

ABOUT SAFANAD LIMITED

 

Safanad is a global principal investment firm that invests in real estate, private equity and public markets. As principal investors, Safanad preserves and grows wealth through carefully selected investments with aligned industry partners. With offices in New York, Dubai, London and Geneva, the firm seeks to identify global investment opportunities poised to deliver consistently attractive returns, where the firm's capital and investment expertise support value creation. Safanad's investment focus is primarily within the healthcare, education, financial services and retail sectors. For more information visit: www.safanad.com.

 

Non-GAAP Measures

 

Extendicare (EXETF) assesses and measures operating results and financial position based on performance measures referred to as "net operating income," "Adjusted EBITDA," and "Adjusted Funds from Operations, or AFFO." These are not measures recognized under GAAP and do not have standardized meanings prescribed by GAAP. These non-GAAP measures are presented in this document because either: (i) management believes that they are a relevant measure of the ability of Extendicare(EXETF) to make cash distributions; or (ii) certain ongoing rights and obligations of Extendicare(EXETF) may be calculated using these measures. Such non-GAAP measures may differ from similar computations as reported by other issuers and, accordingly, may not be comparable to similarly titled measures as reported by such issuers. They are not intended to replace earnings (loss) from continuing operations, net earnings (loss), cash flow, or other measures of financial performance and liquidity reported in accordance with GAAP. Detailed descriptions of these terms can be found in the disclosure documents filed by Extendicare(EXETF) with the securities regulatory authorities, available at www.sedar.com and on Extendicare's(EXETF) website at www.extendicare.com.

 

Forward-looking Statements

 

Information provided by Extendicare(EXETF) from time to time, including this release, contains or may contain forward-looking statements concerning anticipated financial events, results, circumstances, economic performance or expectations with respect to Extendicare(EXETF) and its subsidiaries, including, without limitation, statements regarding: the Company's expected net cash proceeds from the transaction; the expected timing of the closing of the Transaction; the Company's intention with respect to the use of proceeds from the Transaction; the Company's interest in ongoing cash stream for 15 years; its business operations, business strategy, and financial condition. Forward-looking statements can be identified because they generally contain the words "will," "expect," "intend," "anticipate," "believe," "estimate," "project," "plan" or "objective" or other similar expressions or the negative thereof. Forward-looking statements reflect management's beliefs and assumptions and are based on information currently available, and Extendicare(EXETF) assumes no obligation to update or revise any forward-looking statement, except as required by applicable securities laws. These statements are not guarantees of future performance and involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements of Extendicare(EXETF) to differ materially from those expressed or implied in the statements, including, without limitation: the Company's and the Purchaser's ability to close the transaction in the time period anticipated, if at all, which is dependent upon the parties' ability to comply with the closing conditions to the transactions, some of which are beyond the control of the parties; the Purchaser's ability to obtain financing for the transaction; the approval of the transaction by State regulators; certain termination rights of the parties under the share purchase agreement; purchase price adjustments and indemnification rights under the share purchase agreement that could reduce the net cash proceeds to the Company; and other risks relating to the business and industry of the Company that are detailed from time to time in the Company's filings with the Canadian provincial securities regulators. Given these risks and uncertainties, readers are cautioned not to place undue reliance on Extendicare's(EXETF) forward-looking statements. Further information can be found in the disclosure documents filed by Extendicare(EXETF) with the securities regulatory authorities, available at www.sedar.com and on Extendicare's(EXETF) website at www.extendicare.com.

 

For further information, contact:

Dylan T. Mann

Senior Vice President and Chief Financial Officer

Phone: (414) 908-8623

Fax: (905) 470-4003

Email: dmann@extendicare.com

www.extendicare.com

 

[Shane]

I've been following this with some interest, but admittedly without much detail.  I am a bit thrown off by the massive market reaction today.  15x AFFO on the Canadian business leads to a market cap of maybe C$550 + the $220m in cash they just got should lead to a share price in the high 8's.  given the yield potential and interest rate environment, this doesn't seem to make much sense.  Again, this is just a high level analysis.  Anyone have a comment?

[no_free_lunch]

I can't figure out what the AFFO will be after the transaction.  Would prefer to base off of that than EBITDA.

[no_free_lunch]

I am not sure about 15x AFFO either, it looks like leisureworld is closer to 12x.   

[Andy Dufresne]

Market not liking the sale, although the price wasn't horrible - 870m when US TTM AFFO was 32.8 gives a x26.5 multiple. By my (very) rough calculations, current company EV is (at CAD 7 and 88 m shares): 88*7+1111-94-(870*1.135)=660 m. If Canadian TTM AFFO is ~36.2 m, this implies a ~x18.2 EV/AFFO multiple or if we take TTM Adj. EBITDA of roughly CAD 72.5 m around an EV/EBITDA of 9. Not sure if this qualifies as rich or not  :o

 

Source - look at the bottom of p. 18 of the Q2 filing for the Segment AFFO and p. 19 for the Adj. EBITDA:

 

http://www.extendicare.com/uploads/public/51/docs/EXE_Q2-14-QR_SEDAR.pdf

 

 

[Sunrider]

I think the price / transaction and announcement are a frigging disaster and a management team doing what it wants, rather than what is right for shareholders. The reaction is probably because (1) price is well below most estimates bandied around (saw figures in the 1.5bn range) and (2) Management will use the proceeds to go an gamble some more on entry in "verticals".

 

I don't know who owns how much of this but I hope that some of the smaller hedge funds will raise a stink and maybe pressure on management gets them to do the right thing. Or maybe we're lucky and the other side doesn't get financing - then back to the drawing board.

 

Absolutely disgusted (and not just because I'm long).

C.

 

Market not liking the sale, although the price wasn't horrible - 870m when US TTM AFFO was 32.8 gives a x26.5 multiple. By my (very) rough calculations, current company EV is (at CAD 7 and 88 m shares): 88*7+1111-94-(870*1.135)=660 m. If Canadian TTM AFFO is ~36.2 m, this implies a ~x18.2 EV/AFFO multiple or if we take TTM Adj. EBITDA of roughly CAD 72.5 m around an EV/EBITDA of 9. Not sure if this qualifies as rich or not  :o

 

Source - look at the bottom of p. 18 of the Q2 filing for the Segment AFFO and p. 19 for the Adj. EBITDA:

 

http://www.extendicare.com/uploads/public/51/docs/EXE_Q2-14-QR_SEDAR.pdf

[NoCalledStrikes]

It's not like I need another reminder, but when a management team doesn't understand capital allocation, nothing else really matters.

 

The line that really killed me in the call was mgmt saying they were going to deploy the cash into making their business the best and biggest in Canada without any reference to financial metrics.

 

Time for activist to appear.

 

 

[Sunrider]

+100

 

I should engrave this on the back of my hand. Don't invest in these situations unless management demonstrably understands capital allocation or there's an activist on the scene that does.

 

Unbelievable ...

 

 

It's not like I need another reminder, but when a management team doesn't understand capital allocation, nothing else really matters.

 

The line that really killed me in the call was mgmt saying they were going to deploy the cash into making their business the best and biggest in Canada without any reference to financial metrics.

 

Time for activist to appear.

[doc75]

I think the price / transaction and announcement are a frigging disaster and a management team doing what it wants, rather than what is right for shareholders. The reaction is probably because (1) price is well below most estimates bandied around (saw figures in the 1.5bn range) and (2) Management will use the proceeds to go an gamble some more on entry in "verticals".

 

I don't know who owns how much of this but I hope that some of the smaller hedge funds will raise a stink and maybe pressure on management gets them to do the right thing. Or maybe we're lucky and the other side doesn't get financing - then back to the drawing board.

 

Absolutely disgusted (and not just because I'm long).

C.

 

 

What do you mean by management doing "what they want" as opposed to what is right for shareholders?  Are you just saying that they wanted to get a deal done at any cost so they ended up with a shitty deal?  Or are you referring to their "plan" for the proceeds?  Both? 

 

Certainly not a great deal and I took a big hit today.  But frankly there were some pretty pie-in-the-sky scenarios being bandied about.  I saw the 1.5bn figure, too.  Seemed very much like wishful thinking. 

 

Prior to today I think the market was pricing the stock at $8-$8.5 because the expectation was for a deal of  roughly $900mm  but with a large chunk of the proceeds flowing directly to shareholders in short order.  The negative reaction comes from the lack of windfall and acceptance that the regular dividend will now have to decrease until the the proceeds from the sale start earning some cash (and of course the risk that they won't!).

 

The Canadian ops generated about 25.7mm AFFO over the past 9 months, or  $8.5mm = $0.097 per share per quarter.  That will be bumped up a bit by the retained cash stream from the US operations and decreased a bit over time due to current shortfall in gov't funding for increased PSW wages.  So without further growth in the Canadian ops we're looking at around 0.10 per share quarterly AFFO.  The current dividend is 0.12 per quarter at approx 60% payout ratio.  The stock will be crushed if they cut the divi in half, so I expect they'll keep it up as much as possible and try to live with a very high payout  ratio for a while.  Let's say they manage to pay $0.10 per quarter - that's a 5.7% yield for a $7 stock. The yield as of yesterday was roughly 5.7%, so today the market seems to be repricing to that level.

 

FYI:  Someone on here was asking about inside ownership a while back.  Collectively the BOD hold about 1.8mm shares.  Not a big percentage; still real money.